Where to next for gold? We asked a $US17 billion asset manager
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“In my lifetime, the gold price has responded mostly to fear.”
That’s Rick Rule, a 40-year gold industry veteran who now heads up the US division of $US17 billion asset management firm Sprott Inc.
And so far in 2020, there’s been plenty of fear to go around.
By June, 38 of the 141 gold stocks tracked by Stockhead had posted gains of 100 per cent or more, with 98 winners.
That was before gold prices climbed above $US2,000 in August – a gain of around 40 per cent from March lows.
Speaking with Stockhead from California this week, Rule offered his thoughts on the gold price outlook at what marks an interesting juncture in post-Covid asset markets.
For starters, it’s been a topsy turvy week for gold, book-ended by the US election and promising vaccine news.
The latter event saw gold prices fall sharply as investors piled back into value stocks (see: the big bank rally), before rebounding into the close of Tuesday trade.
Political risk is still in play, with key Republican lawmakers refusing to concede the election result.
But Rule said regardless of who becomes US president, the election is something of a “non-event” for gold investors.
“I think it’s important for investors to understand that both parties in the US favour quantitative easing, they both favour debt and deficits and they both favour artificially low interest rates,” he said.
“The truth is that no matter how you look at the narrative, the arithmetic behind the inexorable decline of the purchasing power of fiat-denominated assets remains.”
And although it’s the world’s reserve currency, the US dollar still isn’t immune to the macroeconomic forces which have been accelerated by the policy response to COVID-19.
That includes a race to the bottom on interest rates, where major central banks have now flagged the prospect of negative rate settings, as well as bond-buying and huge fiscal spending.
In that context, even US treasuries, “the go-to safe haven asset for the last 45 years”, perhaps aren’t as safe anymore, Rule said.
“To the extent that both US and global investors become concerned about the purchasing power of USD saving instruments, but particularly US treasury securities, then I think gold will do well,” he said.
The net effect of extra debt, deficits and artificially low interest rates is a debasement of fiat currencies, Rule added.
“All of those things — while they feel good at the time — distort the market, steal demand from future periods and shift it forward to today. And they are also good for gold,” he said.
So if macroeconomic forces are supportive, can gold climb back above the $US2,000 mark from here?
For his part, Rule traced the current uptrend not to COVID-19 but to the start of 2019, when gold broke out of a five-year trading range near $US1,300.
But even in that context, he said it still relatively early days in historic terms.
“If you’re a student of history, what you’ll see over the last 50/60 years is that real gold bull markets are of substantial duration,” Rule said.
“They typically last upwards of eight years, and by my reckoning we’re into this one for around 18 months.”
He added that structural bull markets also act as a rising tide which lift all gold boats, where gold-linked equity indexes (not just the best stocks) still rise by “500-600 per cent” over the long term.
And the latest week of volatility, where prices hopped around amid the election result and vaccine developments, should be viewed in that context, he said.
“I was around for the 1970-1981 bull market and the 2000-2011 bull market,” Rule says.
“In each of those markets, there were cyclical retrenchments. And if you weren’t prepared for them, they were scary. A gold equities index can drop between 10-25 per cent in those cases.”
“So you could call it the election, the virus, call it what you want. I’ve probably been through 30 of them in my life.”
“Anyone who doesn’t expect cyclical volatility in a secular bull market should be in a different asset class,” he said.
Like other aspects of his investment career, Rule’s involvement with the Australian gold industry also goes back a long way.
Sprott’s investment exposure to the local market includes a number of ETF vehicles such as the Sprott Global Gold Separately Managed Account, which has a 30.4 per cent weighting to Australian equities.
The fund is also “extremely involved in exploration projects by Australian-domiciled companies, particularly in Africa”, Rule said.
“In terms of Australian exploration technology in Africa, I’d suggest it’s probably the best export of Australian technology that I’ve seen in the mining business.”
But looking ahead, he said Australian resources companies – not just large players but junior explorers as well – need to continue to integrate with global financial markets.
“For Australian companies over the next five years, one of the biggest differentiators in terms of success will be access to foreign capital markets and access to global investors”, he said.
On that front, he said opportunities abound in both debt and equity capital markets.
“There’s lots of appetite for gold denominated bonds around the world, and Australian companies need to access those,” Rule said.
“Beyond that, I think you’ll find that the success of Canadian resources stocks, particularly the junior sector, is largely due to the preferential access they have to US institutional and retail equity markets.”
“And that door’s wide open for Australian companies.”
Thirdly, while Australian companies have built strong relations with various Asian countries as a supplier of raw materials, those relationships “also need to be deepened”.
“The capital markets for example in Singapore, Taipei and South Korea are ripe for Australian participation,” Rule said.
But for its part, Rule said Sprott has no plans to change its deep investment ties with the Australian market.
“We’re active throughout the value chain in Australia. And we’re also very active in debt markets providing construction and project finance to Australian issuers,” he said.
“I think we’re lucky at Sprott in that we have so many technical analysts who are from Australia. So despite the fact they may live globally, it still gives us a cultural link.”
“So we’re always on the lookout for the next ASX opportunity.”